My Diary 452 --- October 21, 2008 LIBOR Matters or Not

October 21, 2008 --- LIBOR Matters or Not

Overnight, money markets shows sign of improvement, but rates are still far ahead of their levels before September. I think, in general this is good news, indicating the softening of counterparty risk aversion. The more important question is whether normalization in inter-bank lending will lead to normalization in corporate bond market (US HY -100bps in 2 days), which depends both on credit spreads and treasury yields. As a result, I bet Fed will keep policy rates low enough to move the overall economy forward. In addition, Bernanke's endorsement of a stimulus package is another plus.

Today, in Local HK market, the wild card is CITIC FX loss and what that means for confidence of Chinese corporate governance. Baosteel price cuts also in focus. So lots to watch. Expect a strong open and then we fade.

Domestic side, after digesting yesterday’s macro data, I think Chinese government will likely respond with ETE policy actions to mitigate the rapidly growing downside risks. But I do doubt these policies can fully offset the slowdown in exports & investments. However, sentiment can hold up for a while, before we saw the new set of data falling apart ---Yesterday China Mobile and Asia Cement 3Q08 data unveiled the broader based economy slow down.

Oversea Market Review

Global equities rose nearly 4% yesterday with +3.6% in Japan/>/>, +2.8% in EU, and +4.6% in US. UST curve flattened a bit as 2yr increased 8bp to 1.70% while 10yr dipped 9bp to 3.84%. USD strengthened to 16-month high vs. EUR at $1.334, while it held steady vs. YEN at just under 102. 1MWTI oil rose $2.40 to $74.25/bbl.

Money markets are showing signs of improvement. 3M USD Libor declined 36bp, and has fallen 76bp in total from the October 10 peak. The Libor-OIS spread has declined 70bp over this same period. There also has been some modest improvement in the US/>/> commercial paper market. New issuance gradually is migrating to longer maturities (virtually all new issuance was overnight for a period), while borrowing rates have begun to edge down, especially the overnight rate. That said, all these gauges are far from the levels of early September.

COMMENTS

R: Chinese corporate governance - that's an oxymoron of the century! Haha….TED spread back to

M: I think the export manufacture sector has a larger than expected -ve to Chinese economy. You can tell it from commodity, shipping, logistic and lately in employment, infrastructure spending, IP and GDP growth. This is a labor intensive industry and employment is the top priority to CCP. Thus more policy responses are expected going forward…..Indeed, I agree the direction matters, but interestingly to observe HK is decoupling from US so far even there is 88% correlation between TED and MSCI Asia. Inter-bank lending is the first important move, but credit market needs more in the long end, I.e. Mtg markets or corporate bonds! I tend to think overnight US markets was also helped by Bernanke’s support on another fiscal stimulus package --- You can see Energy names up: Coal +15.3%, Steel +13%, Energy +12%, Miners +11%.....One last note, historically, during 1929-1933, there had 7 times of bear market rebounce >20%. I would expect same at least this round as there are far more uncertainty across the board.

Happy trading, too.